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Final Productivity Commission Report Released

On 4 January 2010, the Productivity Commission's Final Report into Director and Executive Remuneration (Report) was released by the Federal Government.

The Report contains 17 recommendations covering areas such as remuneration principles and disclosures, shareholder engagement and conflicts of interest. In the main, these recommendations reflect those contained in the draft report, including the draft recommendations to restrict remuneration report disclosures to key management personnel and to simplify the remuneration report, and the draft recommendation that cessation of employment be removed as a taxing point for deferred equity subject to forfeiture.

Key Changes Since the Draft Report

Two-strikes plus a resolution to 'spill' the board (recommendation 15) - The Productivity Commission has diluted the draft report's two-strikes proposal under which two consecutive 'no' votes equal to or greater than 25% on a company's remuneration report would trigger an automatic re-election of directors. The final recommendation includes an extra hurdle which means that if two consecutive 'no' votes of 25% or more are received, a separate re-election resolution is activated to the effect that all elected directors who signed the directors' report for that year must stand for re-election at an extraordinary general meeting, which must be held within 90 days.

Declarations of 'no vacancy' must be approved by shareholder (recommendation 1) - The Productivity Commission has also retained its draft recommendation that shareholders must approve a declaration of 'no vacancy' on a company board at a general meeting. This recommendation is a response to criticism that boards use the 'no vacancy' rule to exclude outsiders. However, the recommendation has been criticised by business groups who state that boards are best placed to decided how many members are needed to work efficiently and that resolutions such as these will distract boards from protecting the company's financial health and growth prospects.

Implementation (recommendations 16 and 17) - Recommendations 16 and 17 propose, respectively, that:

  • recommendations 2 and 3 on conflict of interest matters, and recommendations 10 and 11 relating to remuneration advisers be implemented by legislation if the ASX and the ASX Corporate Governance Council do not make the requisite changes; and
  • the reforms flowing from the Report be reviewed within 5 years.

The full list of final recommendations can be found here (pdf).

Government Reponse to the Report

In April 2010, the Federal Government indicated how it would respond to the Report. While the Government agreed with many of the Report's recommendations (see responses here), it did not support the recommendation that cessation of employment be removed as a trigger for taxation of deferred employee shares. This will significantly affect the structure of such salaries in the future.

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This entry was written by Chris Barton and Andrew Pollock.

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